Deed of Variation mess

[Taxedtothemax]

I'm worried I've made a stupid mistake that will mean my siblings and I have to pay more IHT.

Background: Dad died last year leaving his entire estate and house to mother (she is on the deed as well) . Her Will is a mirror of his and her estate will be split between me and my siblings when the time comes since dad is dead. Probate is still not completed for dad as his estate is fairly large (estimated at about 1million). My mother is showing early signs of dementia (still has capacity most of the time) and my sister and I have LPA. Mother lives with sister but will likely need to go into a home soon. Mother has in excess of £400k in her own accounts and will get a substantial widows pension soon.

We have had three different solicitors from the same firm work on dad's probate due to staff changes. The previous solicitor (a locum) suggested we do a Deed of Variation so that dad's estate could pass directly to us children since mum didn't need the money (and it was proving hard for her to gift us any money as banks view her as a vulnerable customer and kept freezing her accounts if transfers made). So we all agreed on the DOV (but I was the main sibling to discuss it with the solicitor). It's signed and done so can't be revoked but I'm sat here feeling worried. Am I right in thinking that we are now going to have to pay IHT where none would have been due if we had just left things alone and not bothered with the DOV? Feel like I've cost my siblings a lot of money.

I understand that no tax would have been due for mum to pay as dad was leaving everything to his wife. But now that my siblings and I are the beneficiaries (thanks to the DOV), we will need to pay 40% of anything over £500k (£325k threshold plus property allowance)? Is that right. But if we had left well alone and got nothing until mum passed away, mum would use dad's £500k allowance in addition to her own £500k allowance so no tax would be due unless her estate exceeded 1 million? Is that correct?

Thanks in advance. And yes, I know I'm lucky and am very grateful for this money.

This. Half the house proceeds belong to your mum and are not covered by the deed of variation. This means your mum will have £400k cash and £345k house proceeds. Unless she burns through £245k in care home fees before her death (a possibility although you said she has good pension income and is unwell) she will make full use of all her £500k IHT allowances and the DoV does not change the tax due only the timing of it being paid. So try to relax.

As someone said, the DoV means you get some of the money now and not only when your mum goes so it can be used, invested as each of you wish.

Surely the point is that without the DoV the father's allowance would only be £325k because everything including the house was left to the mother . . ..

With the DoV the allowance increased to £500k because the RNRB could be claimed of £175k.

Surely the point is that without the DoV the father's allowance would only be £325k because everything including the house was left to the mother . . ..

With the DoV the allowance increased to £500k because the RNRB could be claimed of £175k.

In order for a deed of variation to be made, all beneficiaries have to agree. So your siblings have no right to be angry at any outcome. They should have done their own research!
However, none of you are ‘losing’ any money by IHT needing to be paid. The amount you will eventually inherit is calculated after all debts against the estate are paid. Nobody is taking any money off the beneficiaries. IHT is your father’s debt.
People who inherit ££££s and then complain about IHT needing to be paid should remember that the only reason that IHT is due is because the deceased left a great deal of money when they died. The beneficiaries have done absolutely nothing to earn their inheritance - they’ve just struck lucky. Remind your siblings of that when they start complaining about what their father left them.

No, because the father's unused RNRB would have been rolled over and could be used on the mother's death.

If the house was owned as Joint Tenants then it would have been outside the estate of your father and would have been owned by your mother fully upon his death. If it was owned as Tenants in Common then only a proportion of it would have formed part of your father’s estate.
It’s more likely to have been owned as JT. So all the money from the sale will be paid to your mother.

Thank you. I expected I would get comments about privilege as further up thread. I do realise how lucky we are but these things are about more than just money. Would I have swapped this money for a loving and involved father and a mother who was not emotionally abusive and shredded my self-esteem? Yes. Dad came from a very poor background and made a real success of himself ... and spent very little. Our childhood was fairly joyless. It's no surprise that I barely have a relationship with anyone in my family now. I'm a single working parent so this money is life-changing to me. Thanks x

If the house was owned as TIC then the mother will receive half its value. If owned as joint tenants she will now own the full value.

@Soontobe60 no, the DOV was rushed though before completion in the house to ensure that the proceeds could be included in it. I don't have a copy of it as my sister has it. I think all the proceeds are included in the DOV.

You really really need to know if the house was joint tenants or tenants in common.

My understanding is that if it was joint then your fathers half does not form part of the estate - he wouldn’t have been able to leave it to anyone else it simply belongs in full to your mother. So selling it doesn’t add anything to his estate - all the proceeds are your mothers and will come to you as part of her estate. In this situation you can’t use a deed of variation to take any of the proceeds of the house away from your mother - she already owns the full value. DoV can be used on the rest of his assets.

if it’s tenants in common then he has left half the value in his will and the other half is owned by your mother. So it being sold means there’s half of 690 to go to his beneficiaries and half to your mother.

(quick google gave this cornerstonewills.co.uk/news/leaving-jointly-owned-property-will/)

in either case I believe there’s still 500k of allowances for each of them - so their joint estates will still attract the £1m relief, it just varies when you would pay it. Remember IHT is paid by the estate before the beneficiaries get it.

please find a much better solicitor and go through exactly what has happened - it sounds like you’ve been very badly advised - party if you were told to to a DoV on a joint tenancy!

OK, thanks. Can you point to a source for that?

IANA probate lawyer but I wondered as reading this thread if it was possible to use a DOV for jointly owned property, so I googled, and everything I found says that yes it's perfectly possibly to use a DOV in this situation as long as it's correctly worded.

specifically

142Alteration of dispositions taking effect on death.
(1)Where within the period of two years after a person’s death—
(a)any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied, or
(b)the benefit conferred by any of those dispositions is disclaimed,
by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions, this Act shall apply as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred.

Lmjgtfy
www.gov.uk/guidance/inheritance-tax-transfer-of-threshold

here you go:

https://www.gov.uk/guidance/inheritance-tax-transfer-of-threshold

The solicitor should have advised on the IHT position or advised you to take separate tax advice so if you end up paying more as a result of his advice you potentially have a claim for negligence

Yes and this type of estate and death is very common. I suspect the reason the solicitor talked little about IHT was because it was clear nothing in the deed of variation would impact the amount of tax payable only the timing. But if being passed around the firm's staff means a mistake was made you can sue.

As @Another2Cats has very kindly shown a poster there is a lot of info on gov.uk about the allowances, thresholds, treatment of asset types etc.

Another good finance specific forum is Money Saving Expert which has a wills and probate section with some very knowledgeable people (although a few posters here seem to know their stuff).

OP - you need a session with your solicitor to see the calcs and answer your questions on the house ownership, deed of variation content etc.

@Metempsychosis posted the same link too.

The question that hasn't been raised is whether the mother was actually competent to execute the deed of variation. That's only an issue if someone chooses to object; there are no external probate police who are poised to swoop in and assess this.

But if it turns out that you have made a very poor financial decision due to poor legal advice then It might possibly be a mechanism for the solicitors to get the DOV nullified?

My guess is that the only IHT effect is timing anyway so it's no big deal, but your solicitors can advise.

I agree with the people who say it may well make no difference you will pay 40% tax eventually on both parents assets minus both parents IHT allowances. Whether you do it in two stages (some (looks like mainly) when your Dad died and anything else when your Mum dies) or you pay it all when your Mum dies (as she inherits all your Dad's assets). As said if your Mum needs to spend a lot of money on care homes, etc, the amount of the inheritance will go down and so will the tax due so you won't really gain anything.

Many thanks again. I've asked for a call Monday with the latest solicitor. You've given me some guidance on what to ask now. Much appreciated.

A little update for those who are interested. The locum solicitor who did the Deed of Variation messed up hugely... but messed up twice so it actually benefited us. What she thought she was doing was ensuring dad's estate and proceeds form the house would pass straight to me and my siblings rather than to mum. Had this worked, we would have been hit with a huge IHT bill for everything over £325k. she had advised no tax due unless estate over £1million and stated there would be no significant difference in tax paid overall. What she didn't know was that my parents owned their house as Joint Tennants so it was impossible for the DOV to alter the fact that the house became mum's as soon as dad died. All the house sale money is sat with this firm as the solicitor genuinely thought she had altered the property ownership. So now, mum gets the house sale proceeds and when she dies, she will have a tax free threshold of £675k (her £325k plus dad's nil rate and her own relating to the house).

thanks again

The locum solicitor has moved on but I feel a complaint should be made as she gave us incorrect advice.

Let's break down the key points and implications regarding Inheritance Tax (IHT) and the Deed of Variation (DoV).

Key Points:
Inheritance Tax Thresholds:

1. Each individual has a nil-rate band of £325,000.
2. There is an additional residence nil-rate band (RNRB) of up to £175,000 if the family home is passed to direct descendants.
3. When one spouse dies and leaves everything to the surviving spouse, the unused nil-rate band and RNRB can be transferred to the surviving spouse, effectively doubling the thresholds for the surviving spouse's estate.

Deed of Variation:

1. A DoV allows beneficiaries to alter the distribution of an estate within two years of the death, potentially for tax planning purposes.
2. If the DoV redirects assets from the surviving spouse to other beneficiaries, it can trigger IHT if the value exceeds the nil-rate band.

Your Situation:

1. Initial Scenario: If your father's estate had passed entirely to your mother, no IHT would have been due at that time due to the spousal exemption. Upon your mother's death, her estate would benefit from both her and your father's nil-rate bands and RNRBs, potentially allowing up to £1 million to be passed tax-free.
2. Post-DoV Scenario: The DoV redirected your father's estate to you and your siblings. This means:
3. The estate exceeding £325,000 (plus any applicable RNRB) would be subject to IHT at 40%.
4. The house, being jointly owned, automatically passed to your mother upon your father's death, and the DoV could not alter this.

Implications:

1. House Proceeds: Since the house was owned as joint tenants, it passed to your mother by survivorship, not through the estate. Therefore, the DoV could not affect this transfer.
2. IHT on Father's Estate: If the DoV redirected other assets (excluding the house) to you and your siblings, IHT would be due on the amount exceeding the nil-rate band of £325,000.

Steps to consider:

1. Clarify the DoV: Ensure you have a clear understanding of what assets were included in the DoV. If the house was incorrectly included, this needs to be rectified.
2. IHT Calculation: Calculate the IHT liability based on the assets redirected by the DoV. If the estate (excluding the house) exceeds £325,000, IHT will be due on the excess.
3. Complaint: Given the incorrect advice and the potential financial implications, you may have grounds for a complaint against the solicitor who handled the DoV. This could be pursued through the firm's internal complaints procedure or escalated to the Legal Ombudsman if necessary.

Conclusion:
It appears that the house proceeds should not have been included in the DoV due to the joint tenancy. This means your mother retains the house proceeds, and her estate will benefit from the combined nil-rate bands upon her passing. However, any other assets redirected by the DoV may still be subject to IHT.

@Unwildered if only lawyers explained things that beautifully when you actually asked/paid them! Sounds like OP has lucked out by double incompetence from the locum and won't be hit by anything at this point if the amount other than the house value is under her father's £325K allowance.

Although I think a very stern letter to the solicitors and anyone who regulates the locum is needed - this could have gone VERY wrong!